Suppose a consumer with an income of $100 who is faced with P_x = 1 and P_y = 1/2.What is the market rate of substitution between good X (horizontal axis) and good Y (vertical axis)? A)0.50. B)-1.0. C)-2.0. D)-4.0.

Question

Quizplus · Accepted Answer

The market rate of substitution can be calculated by taking the absolute value of the slope of the indifference curve at the given point. In this case, the slope is -2. Therefore, the market rate of substitution between X and Y is 2. To maximize utility given the budget constraint, the consumer should only consume good X since it has a higher marginal utility per dollar spent ($1 for 1 unit of X compared to $0.50 for 1 unit of Y). So the best choice is:
Answer: X 
 Since the consumer should only consume good X to maximize utility given the budget constraint, the best choice is to only buy good X.

Suppose a Consumer with an Income of $100 Who Is